Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AMRI > SEC Filings for AMRI > Form 10-K on 18-Mar-2013All Recent SEC Filings

Show all filings for ALBANY MOLECULAR RESEARCH INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for ALBANY MOLECULAR RESEARCH INC


18-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We are a global contract research and manufacturing organization that provides customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies that support the discovery and development of pharmaceutical products and the manufacturing of active pharmaceutical ingredients ("API") and drug product for existing and experimental new drugs. With locations in the United States, Europe, and Asia, we maintain geographic proximity and flexible cost models. We have also historically leveraged our drug-discovery expertise to execute on several internal drug discovery programs, which have progressed to the development candidate stage and in some cases into Phase I clinical development. We have successfully partnered certain programs and are actively seeking to out-license our remaining programs to strategic partners for further development.

We continue to integrate our research and manufacturing facilities worldwide, increasing our access to key global markets and enabling us to provide our customers with a flexible combination of high quality services and competitive cost structures to meet their individual outsourcing needs. Our service offerings range from early stage discovery through manufacturing and formulation across U.S., Europe and Asia. We believe that the ability to partner with a single provider is of significant benefit to our customers as we are able to provide them with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market. Compounds discovered and/or developed in our contract research facilities can then be more easily transitioned to production at our large-scale manufacturing facilities for use in clinical trials and, ultimately, commercial sales if the product meets regulatory approval.

Additionally, we offer our customers a fully integrated manufacturing process for sterile injectable drugs. This includes the development and manufacture of the API, the design of the criteria to formulate the API into an injectable drug product, and the manufacture of the final drug product. We continue to make investments to build and recover our formulation business, as we believe this type of business has significant potential in the drug product world driven by the growth in biologically based compounds which are formulated/manufactured on an aseptic basis.

In addition to providing our customers our hybrid services model for outsourcing, we now offer the option of insourcing. With our world class expertise in managing high performing groups of scientists, this option allows us to embed our scientists into the customer's facility allowing the customer to cost effectively leverage their unused laboratory space.

As our customers continue to seek innovative new strategies for R&D efficiency and productivity, we are aggressively realigning our business and resources to address their needs. To that end, we have launched AMRI SMARTSOURCING™, a cross functional approach that maximizes the strengths of both insourcing and outsourcing, by leveraging AMRI's people, know-how, facilities, expertise and global project management to provide exactly what is needed across the discovery or development process. We have also streamlined our sales and marketing organization to optimize cross-selling opportunities and enhanced our commitment to quality with the appointment of key personnel at our Burlington aseptic services facility, both underscoring our dedication to client service. Our improved organizational structure, combined with more focused marketing efforts, should enable us to continue to drive long term growth and profitability.

In 2011, we made a decision to cease activities related to our internal proprietary compound discovery R&D programs. Although we halted our proprietary R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing. Our goal is to partner these compounds or programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if any compound based on our intellectual property is successfully developed into new drugs and reach the market.

In March 2012, we approved a restructuring plan that ceased all operations at our Budapest, Hungary facility effective March 30, 2012. In November 2012, we approved a restructuring plan to cease all operations at our Bothell, WA facility. The goal of these restructuring activities is to advance our continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences.

Our total revenue for 2012 was $226.7 million, including $189.9 million from our contract service business and $36.0 million from royalties on sales of Allegra/Telfast and certain products sold by Actavis, Inc ("Actavis"). We generated $15.3 million in cash from operations, and we used $9.9 million for capital expenditures on our facilities and equipment, primarily related to maintaining and upgrading our U.S. facilities. We recorded a net loss of $3.8 million in 2012, largely the result of $8.3 million of long-lived asset impairment charges and $4.6 million of restructuring charges. As of December 31, 2012, we had $28.5 million in cash, cash equivalents and restricted cash and $8.0 million in bank and other related debt.

Results of Operations

Operating Segment Data

We have organized our sales, marketing and production activities into the Discovery, Drug Development and Small Scale Manufacturing ("DDS") and Large Scale Manufacturing ("LSM") segments based on the criteria set forth in ASC 280, ''Disclosures about Segments of an Enterprise and Related Information.'' We rely on an internal management accounting system to report results of these segments. The accounting system includes revenue and cost information by segment. We make financial decisions and allocate resources based on the information we receive from this internal system. The DDS segment includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. The LSM segment includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates, sterile syringe and vial filling, and high potency and controlled substance manufacturing.

Contract Revenue

Contract revenue consists primarily of fees earned under contracts with third-party customers. Our contract revenues for our DDS and LSM segments were as follows:

Year Ended December 31,

          2012          2011          2010
                   (in thousands)
DDS     $  73,458     $  74,032     $  83,308
LSM       116,400        95,579        79,920
Total   $ 189,858     $ 169,611     $ 163,228

DDS contract revenues for the year ended December 31, 2012 remained consistent with amounts recognized in the same period in 2011 including lower contract revenue for our biology discovery services and development and small-scale manufacturing services, offset in part by an increase in our U.S. chemistry discovery services.

We currently expect DDS contract revenue for full year 2013 to increase from amounts recognized in 2012 primarily due to an increase in demand for our U.S. chemistry services, offset in part by a decrease in our biology services.

DDS contract revenues decreased for the year ended December 31, 2011 from the same period in 2010 primarily due to lower contract revenue from our discovery services of $10.7 million, offset in part by an increase in our development and small-scale manufacturing services of $1.5 million. The decrease in discovery services contract revenue was primarily due to lower demand for our U.S. medicinal chemistry services, partially offset by higher demand for our discovery services at our Asia locations. The increases in contract revenue from development and small-scale manufacturing services were attributable to higher demand for our chemistry development services.

LSM contract revenue significantly increased for the year ended December 31, 2012 from the same period in 2011 as a result of higher commercial manufacturing services at our Rensselaer, NY facility, as well as continued improvement at our UK facility.

We currently expect continued growth in LSM contract revenue for full year 2013 due to strong demand for our commercial manufacturing services.

LSM contract revenue increased for the year ended December 31, 2011 from the same period in 2010 as a result of higher commercial and API development manufacturing shipments from our Rensselaer, NY facility, as well as increased intermediate manufacturing in our Aurangabad, India facility as compared to the same period in 2010.

Recurring royalty revenue

Year Ended December 31, 2012 2011 2010

(in thousands)

$ 35,988 $ 35,034 $ 34,838

The largest portion of our recurring royalties are based on the worldwide sales of Allegra/Telfast, as well as on sales of Sanofi over-the-counter ("OTC") product and authorized generics. Additionally, beginning in the third quarter of 2012 we earned recurring royalty revenue in conjunction with a Development and Supply Agreement with Actavis at the Company's Rensselaer, NY manufacturing facility.

Recurring royalties increased during the year ended December 31, 2012 from the same period in 2011 due to the receipt of Actavis royalties of $4.7 million. This increase was offset in part by a $3.7 million decrease in royalties recognized from the sales of prescription Allegra which was primarily due to decreased sales in Japan in the first quarter of 2012 as a result of a less severe allergy season.

We currently expect full year 2013 recurring royalties to slightly increase over amounts recognized in 2012 primarily due to incremental royalties from Actavis, partially offset by lower Allegra royalties.

Recurring royalties slightly increased for the year ended December 31, 2011 as compared to the same period in 2010 primarily due to a significant increase in sales of prescription Allegra in Japan, partially offset by a decrease in royalties recognized from the sale of Allegra products in the U.S.

The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. We continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra/Telfast royalties.

Milestone revenue

Milestone revenue is earned for achieving milestones included in licensing and research agreements with certain of our partners. Milestone revenues were as follows:

Year Ended December 31, 2012 2011 2010

(in thousands)

$ 840 $ 3,000 $ -

Milestone revenue received during the year ended December 31, 2012 was recognized primarily in conjunction with the Company's license and research agreement with BMS for advancing a fourth compound into preclinical development.

Milestone revenue of $3.0 million received during the year ended December 31, 2011 was recognized in conjunction with the Company's license and research agreement with BMS and was specifically based on meeting a Phase II clinical trial milestone of an AMRI compound licensed exclusively to BMS.

No milestone revenue was recorded during the year ended December 31, 2010.

Cost of Contract Revenue



Cost of contract revenue consists of compensation and associated fringe benefits
for employees, chemicals, depreciation and other indirect project related costs.
Cost of contract revenue for our DDS and LSM segments were as follows:



                                     Year Ended December 31,
                                2012          2011           2010
                                          (in thousands)
DDS                           $  70,366     $  72,758      $  72,903
LSM                              97,698        95,712         79,770
Total                         $ 168,064     $ 168,470      $ 152,673
DDS Gross Contract Margin           4.2 %         1.7 %         12.5 %
LSM Gross Contract Margin          16.0 %        (0.1 )%         0.2 %
Total Gross Contract Margin        11.5 %         0.7 %          6.5 %

DDS contract revenue gross margin percentages increased for the year ended December 31, 2012 compared to the same period in 2011. These increases are primarily due to cost savings initiatives taken in our U.S chemistry operations in 2011, as well as the impact of the closure of our Hungarian operations in 2012, offset in part by lower demand for our U.S. biology and development services in relation to our fixed costs.

We currently expect DDS contract margins for 2013 to improve over amounts recognized in 2012 due to cost savings initiatives in our global discovery services platform along with improved facility utilization.

LSM's contract revenue gross margin percentages improved for the year ended December 31, 2012 compared to the same period in 2011. This increase is primarily due to an increase in sales of higher margin products for our U.S. manufacturing services, as well as an increase in capacity utilization at our large-scale manufacturing facilities worldwide.

We currently expect continued improvement in LSM contract margins for 2013 driven by an increase in capacity utilization in relation to our fixed costs.

DDS contract revenue gross margin percentages decreased for the year ended December 31, 2011 compared to the same period in 2010. This resulted from lower demand for our discovery services in relation to our fixed costs.

LSM's contract revenue gross margin slightly decreased for the year ended December 31, 2011 compared to the same period in 2010. This decrease was primarily due to levels of fixed cost base at our Burlington, MA facility as compared to its revenues due to the disruption at the facility resulting from the FDA warning letter received in August 2010, along with unutilized capacity at our AMRI UK facility. These decreases were partially offset by an increase in margins for our U.S. API manufacturing services.

Technology Incentive Award

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from Allegra are the main driver of the awards. Accordingly, as the creator of the technology, the award is currently payable primarily to Dr. Thomas D'Ambra, the Chief Executive Officer and President of the Company. The incentive awards were as follows:

Year Ended December 31, 2012 2011 2010

(in thousands)

$ 3,143 $ 3,557 $ 3,484

We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods. Technology incentive award expense decreased for the year ended December 31, 2012 as compared to the same period in 2011 due to the decrease in Allegra recurring royalty revenue as discussed above.

Technology incentive award expense for the year ended December 31, 2011 remained consistent as compared to 2010 which reflected the relative consistency in Allegra royalty revenue.

Research and Development

Research and development ("R&D") expense consists of compensation and benefits for scientific personnel for work performed on proprietary technology R&D projects, costs of chemicals, materials, outsourced activities and other out of pocket costs and overhead costs.

During the fourth quarter of 2011, the Company made a decision to cease activities related to its internal discovery research and development programs, excluding generic programs. Although we ceased our proprietary new compound R&D activities, we continue to believe there are additional opportunities to partner these programs in return for appropriate consideration if our technology results in compounds that are successfully developed into new drugs and reach the market. In addition, R&D activities continue at our large-scale manufacturing facility related to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes.

Research and development expenses were as follows:

Year Ended December 31, 2012 2011 2010

(in thousands)

$ 906 $ 7,939 $ 11,090

R&D expense for the year ended December 31, 2012 decreased to $0.9 million as a result of our strategic decision during the fourth quarter of 2011 to cease R&D operations related to our internal discovery research and development programs, excluding our generics program. R&D expenditures incurred during 2012 related primarily to developing new niche generic products and improving process efficiencies in our manufacturing plants.

Based on our strategic decision to cease R&D operations, we currently expect 2013 R&D expense to be consistent with amounts recognized in 2012.

Research and development expenses for the year ended December 31, 2011 decreased 28% from the year ended December 31, 2010. This decrease was primarily due to an overall decrease in internal operating costs as we strategically managed our R&D investments and continued to narrow the focus of R&D spending on those programs with the highest licensing potential, as well as a decrease in clinical trial costs related to our oncology and obesity programs.

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses consist of compensation and related fringe benefits for sales, marketing, operational and administrative employees, professional service fees, marketing costs and costs related to facilities and information services. SG&A expenses were as follows:

Year Ended December 31, 2012 2011 2010

(in thousands)

$ 40,904 $ 41,071 $ 42,234

Selling, general and administrative expenses for the year ended December 31, 2012 remained relatively flat as compared to the same period in 2011. Decreases in SG&A resulting from ongoing actions related to cost savings were offset by non-recurring executive transition costs.

We currently expect SG&A expenses for 2013 to decrease from amounts recognized in 2012 due to on-going cost saving actions partially offset by inflation.

Selling, general and administrative expenses for the year ended December 31, 2011 decreased from the same period in 2010. This decrease was primarily attributable to nonrecurring acquisition costs and reductions in AMRI Burlington remediation costs compared to the levels incurred in 2010.

Goodwill Impairment

Year Ended December 31,
2012 2011 2010
(in thousands)

$ - $ 15,812 $ 36,844

During the fourth quarter of 2011, we recorded a goodwill impairment charge of $15.8 million in our DDS operating segment due to a change in the implied fair value of the segment's goodwill to below its carrying value. The change in the fair value of the segment was primarily attributable to significantly lower than forecasted demand for contract services in 2011, which resulted in a decrease in management's long-term estimates of operating results and cash flows for the segment.

During the fourth quarter of 2010, we recorded a goodwill impairment charge of $36.8 million in our LSM operating segment due to a change in the implied fair value of the segment's goodwill to below its carrying value. The change in the fair value of the segment was primarily attributable to the fact that in the fourth quarter of 2010 several events occurred in the LSM segment that significantly impacted our expected future performance for this segment. Our AMRI UK facility was notified of an unplanned significant reduction in demand for a key commercial product, which had historically represented a significant amount of annual revenues at the site. In addition, the FDA warning letter issued to our AMRI Burlington facility was expected to have both continued negative short-term financial impact during the remediation process, as well as delaying the planned integration of the AMRI Burlington business into our overall LSM platform and the forecasted resulting growth in the long term.

Property and Equipment Impairment

Year Ended December 31,
2012 2011 2010
(in thousands)

$ 8,334 $ 4,674 $ 10,848

During 2012, we recorded long-lived asset impairment charges of $8.3 million in our DDS segment in order to further optimize the Company's location footprint and cease operations at our Budapest, Hungary and Bothell, Washington facilities.

In the fourth quarter of 2011, we recorded long-lived asset impairment charges of $4.7 million in our DDS segment associated with the Company's decision to terminate its lease and exit one of its U.S. facilities as part of the overall initiative to reduce the Company's workforce, right size capacity, and reduce operating costs.

In 2010, we recorded long-lived asset impairment charges of $4.8 million in our DDS segment. As a result of realigning some of the AMRI U.S. operating activities, the Company evaluated the future economic benefit expected to be generated from the revised operating activities in this facility against the carrying value of the facility's property and equipment and determined that these assets were impaired. Additionally, we recorded a long-lived asset impairment charge of $6.0 million in our LSM segment upon determining that the carrying value of certain assets at our AMRI India location used in the manufacturing of generic products was not recoverable based on projections of future revenues and cash flows expected to be derived from the use of these assets.

Intangible Impairment

Year Ended December 31,
2012 2011 2010
(in thousands)

$ - $ 856 $ -

In the fourth quarter of 2011, we identified patent assets relating to technologies that we no longer expect to derive value from as a result of the Company's decision to cease internal R&D activities. We recorded an intangible impairment charge of $0.9 million in our DDS segment in conjunction with this review of our patent portfolio.

Restructuring Charges

Year Ended December 31,
2012 2011 2010
(in thousands)

$ 4,632 $ 1,271 $ 3,090

During 2012, we approved restructuring plans to cease all operations at our Budapest, Hungary, and Bothell, WA facilities. The goal of these restructuring activities is to advance our continued strategy of increasing global competitiveness and to remain diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences. Additionally, we intend to expand and better integrate our in vitro biology services with the total drug discovery service platform and to further optimize the Company's location footprint. In connection with these actions, we recorded restructuring charges of $4.6 million in 2012.

We exited the Budapest, Hungary facility in the third quarter of 2012 and are in the process of resolving the termination of the lease.

In December 2011, we initiated a restructuring plan at one of our U.S. locations which included actions to reduce our workforce, right size capacity, and reduce operating costs. These actions were implemented to better align the business to current and expected market conditions and are expected to improve our overall cost competitiveness and increase cash flow generation. The workforce reduction primarily affected certain positions associated with our elimination of internal R&D activities. As a result of the workforce reduction, we have terminated the lease of one of our U.S. facilities which will result in a reduction in annual operating expenses related to this facility. As a result of this restructuring, we recorded a restructuring charge in the DDS operating segment of $0.3 million in the fourth quarter of 2011 and $0.3 million in 2012.

In May 2010, we initiated a restructuring of our AMRI U.S. locations. As part of our strategy to increase global competitiveness and continue to be diligent in managing costs, we implemented cost reduction activities at our operations in the U.S. These cost reduction activities included a reduction in the U.S. workforce, as well as the suspension of operations at one of our research laboratory facilities in Rensselaer, New York. Employees and equipment from this facility were consolidated into other nearby Company operations. We recorded a restructuring charge of $3.2 million in 2010. This charge included lease termination charges of $2.2 million (net of estimated sublease income), termination benefits and personnel realignment costs of $0.8 million and facility and other costs of $0.2 million.

Anticipated cash outflow related to the restructuring activities for 2013 is approximately $2.1 million.

Arbitration charge

Year Ended December 31, 2012 2011 2010

(in thousands)

$ - $ 127 $ 9,798

On August 19, 2009, AMRI Rensselaer notified one of its suppliers that it was cancelling a purchase agreement between the parties pursuant to a hardship clause of the agreement. Our supplier commenced arbitration in September 2009 with International Centre for Dispute Resolution ("ICDR") seeking damages for AMRI Rensselaer's alleged wrongful repudiation of the agreement.

On October 13, 2010 the ICDR issued an arbitration award in favor of our supplier against AMRI Rensselaer and awarded damages of $8.7 million plus interest at the rate of 9% starting from August 19, 2009. AMRI accrued $9.8 million for the award and related interest expense in the year ended December 31, 2010.

On March 2, 2011, AMRI Rensselaer and our supplier entered into a Settlement and Supply Agreement ("Agreement") which served to settle the arbitral award and other legal proceedings related to the arbitral award that were pending. The Agreement required AMRI Rensselaer to pay $4.8 million to our supplier and provide a letter of credit to secure the remainder of the arbitral award plus accrued interest. The letter of credit will reduce quarterly based on certain volume purchase milestones. The Agreement also re-establishes the supply relationship between AMRI and our supplier through 2018 with mutually beneficial terms.

As the letter of credit is reduced, the Company reverses the allocated portion of the accrued charge through a reduction in the carrying cost of the associated inventory. The maximum amount to be reversed is $5.5 million through 2014. As of December 31, 2012, the remaining arbitration reserve is $2.7 million.

Arbitration charges of $0.1 million in 2011 represented accrued interest expense related to the award prior to the arbitration settlement.

Interest (expense) income, net

                                     Year Ended December 31,
. . .
  Add AMRI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AMRI - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.